DBRS Confirms Vancity’s Short-Term Rating at R-1 (low)

DBRS has today confirmed the Short-Term Instruments rating of Vancouver City Savings Credit Union (Vancity or the Credit Union) at R-1 (low) with a Stable trend.

The rating remains supported by the relatively low-risk base business, which primarily focuses on providing consumer financial services, with an emphasis on core-deposit funded residential mortgage lending. Vancity’s rating is further strengthened by reasonable market penetration in its core market of the Greater Vancouver Area and southern Vancouver Island.

Vancity continues to face two key issues: (1) the Credit Union has a high-cost structure that, if not addressed, could limit its ability to compete on price and/or reinvest in the business in the future and (2) non-interest income remains an underrepresented revenue source, which is an important issue to address given DBRS’s expectation of continued long-term margin compression in the financial services industry.

Vancity continues to benefit from its relationship with Central 1 Credit Union (Central 1), particularly with respect to Central 1’s large liquidity pool. Under the DBRS support assessment rating system, Vancity is assessed SA2, reflecting the expectation of timely systemic external support from Central 1. Support assessments for credit unions are unique in that the supporting organization is partially owned by the supported one rather than the other way around.

In 2008, Vancity recorded a 41% increase in earnings before taxes, unusual items, patronage rebates and contributions over 2007, although the improvement was largely driven by net derivative (interest rate-related) and securitization gains. Both 2008 and 2007 included the impact of charges related to Montréal Accord asset-backed commercial paper (ABCP). Interim reports are not public, although DBRS has access to the results as part of our due diligence. H1 2009 earnings (before taxes, unusual items and distributions) weakened on resumed margin compression and modestly higher loan loss provisions, partially offset by lower expense levels.

Asset quality has weakened as a result of the weak economy and rising unemployment, although Vancity’s asset quality metrics remain strong, reflecting the conservative nature of the portfolio.

The Credit Union has taken some steps to address its high-cost structure, including a reduction in its workforce announced in December 2008. Further streamlining the operation, in July 2009, Vancity announced it would sell its general insurance operation. In August 2009, Vancity announced it had sold the residential mortgage, personal loan and real estate secured line of credit portfolios of its wholly owned subsidiary, Citizens Bank of Canada (Citizens). Citizens, which was never very profitable (a small operating loss in 2008, excluding ABCP-related charges), will become a small non-deposit-taking bank focused on Visa credit card services and foreign exchange services. At June 30, 2009, Citizens had $64 million in Tier 1 capital and $96 million in total capital, a substantial portion of which will be freed up for other opportunities for the Credit Union.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Canadian Provincial Credit Union Centrals, Credit Unions and Desjardins Group, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.